Prospectus and Allotment of Securities – CA Inter Law Study Material

Prospectus and Allotment of Securities – CA Inter Law Study Material is designed strictly as per the latest syllabus and exam pattern.

Prospectus and Allotment of Securities – CA Inter Law Study Material

Matters to be stated in the prospectus (Sec. 26)

Question 1.
The Board of Directors of Dr. Sunny Pharmaceutical Limited has allotted shares to the investors at large without issuing a prospectus. State whether the allotment made by the company is valid and briefly describe the related consequences.
Answer:
Issue of Securities to Public:

As per Sec. 23 of the Companies Act, 2013, a public company can issue securities to public only by issue of prospectus.
As per Sec. 26 of the Companies Act, 2013, prospectus shall state such information and set out such reports on financial information as may be specified by the SEB1 in consultation with the C.G. and file copy of prospectus to Registrar, on or before date of Publication.
If a prospectus is issued in contravention of the provisions of Sec. 26, the company shall be punishable with fine varying from ₹ 50,000 to ₹ 3 lacs and every person who is knowingly a party to the issue of such prospectus shall be punishable with fine varying from R 50,000 to ₹ 3 Lacs.

Conclusion: Allotment is void. Company will have to refund the entire moneys received and will also be punishable u/s 26(9) of the Act.

Question 2.
The Board of Directors of Chandra Mechanical Toys Limited proposes to issue a prospectus inviting offers from the public for subscribing to the equity shares of the company. State the reports which shall be included in the prospectus for the purposes of providing financial information under the provisions of the Companies Act, 2013. [RTP- Nov. 20, May 22; Nov 19 (4 Marks)]
Answer:
Matters to be stated in Prospectus:
As per Sec. 26 of Companies Act, 2013, every prospectus issued by or on behalf of a public company either with reference to its formation or subsequently, or by or on behalf of any person who is or has been engaged or interested in the formation of a public company, shall be dated and signed.

Prospectus shall state such information and set out such reports on financial information as may be specified by the SEBI in consultation with the C.G. It is provided that until the SEBI specifies the information and reports on financial information u/s 26, the regulations made by the SEBI under the SEBI Act, 1992, in respect of such financial information or reports on financial information shall apply.

The prospectus shall make a declaration about the compliance of the provisions of this Act and a statement to the effect that nothing in the prospectus is contrary to the provisions of this Act, the Securities Contracts (Regulation) Act, 1956 and the SEBI Act, 1992 and the rules and regulations made thereunder.

Shelf Prospectus (Sec. 31)

Question 3.
Prakhar Ltd. intends to raise share capital by issuing equity shares in different stages over a certain period of time. However, the company does not wish to issue prospectus each and every time of issue of shares. Considering the provision of the Companies Act, 2013, discuss what formalities Prakhar Ltd. should follow to avoid repeated issuance of prospectus? [RTP-Nov. 18]
Answer:
Shelf Prospectus:
Sec. 31 of Companies Act, 2013 deals with the provisions relating to issue of Shelf prospectus. As per the Explanation to Sec. 31 of the Companies Act, 2013, the expression “Shelf Prospectus” means a prospectus in respect of which the securities or class of securities included therein are issued for subscription in one or more issues over a certain period without the issue of a further prospectus.

So, to avoid issue of prospectus each and every time of issue of shares, Prakhar Ltd, can issue a shelf prospectus.

Formalities to be complied with in case of Shelf Prospectus:

Any class or classes of companies, as the SEB1 may provide by regulations in this behalf, may file a shelf prospectus with the Registrar at the stage of the first offer of securities included therein.
Shelf prospectus shall indicate a period not exceeding 1 year as the period of validity of such prospectus which shall commence from the date of opening of the first offer of securities under that prospectus.
A company filing a shelf prospectus shall be required to file an information memorandum containing all material facts relating to new charges created, changes in the financial position of the company as have occurred between the first offer of securities or the previous offer of securities and the succeeding offer of securities and such other changes as may be prescribed, with the Registrar prior to the issue of a second or subsequent offer of securities under the shelf prospectus.
The information memorandum shall be prepared in form PAS-2 and filed with the Registrar along with fee within 1 month prior to the issue of a second or subsequent offer of securities under the shelf prospectus.

Question 4.
What is a Shelf Prospectus? State the important provisions relating to the issuance of Shelf- Prospectus under the provision of Companies Act, 2013 and the Companies (Prospectus and Allotment of Securities) Rules, 2014. [Nov. 18 (6 Marks)]
Answer:
Shelf Prospectus:
Meaning of Shelf Prospectus: As per the Explanation to Sec. 31 of the Companies Act, 2013, the expression “shelf prospectus” means a prospectus in respect of which the securities or class of securities included therein are issued for subscription in one or more issues over a certain period without the issue of a further prospectus.

Provisions relating to Shelf Prospectus (Sec. 31):

Any class or classes of companies, as the SEB1 may provide by regulations in this behalf, may file a shelf prospectus with the Registrar at the stage of the first offer of securities included therein.
Shelf prospectus shall indicate a period not exceeding 1 year as the period of validity of such prospectus which shall commence from the date of opening of the first offer of securities under that prospectus.
A company filing a shelf prospectus shall be required to file an information memorandum containing all material facts relating to new charges created, changes in the financial position of the company as have occurred between the first offer of securities or the previous offer of securities and the succeeding offer of securities and such other changes as may be prescribed, with the Registrar prior to the issue of a second or subsequent offer of securities under the shelf prospectus.
The information memorandum shall be prepared in form PAS-2 and filed with the Registrar along with fee within 1 month prior to the issue of a second or subsequent offer of securities under the shelf prospectus.

Question 5.
ABC Limited proposes to issue series of debentures frequently within a period of one year to raise the funds without undergoing the complicated exercise of issuing the prospectus every time of issuing a new series of debentures. Examine the feasibility of the proposal of ABC Limited having taken into account the concept of deemed prospectus dealt with under the provisions of the Companies Act, 2013. [July 21 (3 Marks), MTP-March 22]
Answer:
Issue of Securities through Shelf Prospectus:
Sec. 31 of Companies Act, 2013 deals with the provisions relating to issue of Shelf prospectus. As per the Explanation to Sec. 31 of the Companies Act, 2013, the expression “Shelf Prospectus” means a prospectus in respect of which the securities or class of securities included therein are issued for subscription in one or more issues over a certain period without the issue of a further prospectus.

So, to avoid issue of prospectus each and every time of issue of shares, ABC Limited can issue a shelf prospectus.

Filing of Shelf Prospectus:

Any class or classes of companies, as the SEBI may provide by regulations in this behalf, may file a shelf prospectus with the Registrar at the stage of the first offer of securities included therein.
Shelf prospectus shall indicate a period not exceeding 1 year as the period of validity of such prospectus which shall commence from the date of opening of the first offer of securities under that prospectus.
In respect of a second or subsequent offer of such securities issued during the period of validity of that prospectus, no further prospectus is required.
A company filing a shelf prospectus shall be required to file an information memorandum containing all material facts relating to new charges created, changes in the financial position of the company as have occurred between the first offer of securities or the previous offer of securities and the succeeding offer of securities and such other changes as may be prescribed, with the Registrar within the prescribed time, prior to the issue of a second or subsequent offer of securities under the shelf prospectus.
Where an information memorandum is filed, every time an offer of securities is made with all the material facts with the registrar, such memorandum together with the shelf prospectus shall be deemed to be a prospectus.

Red Herring prospectus

Question 6.
The Board of Directors of ABC Limited are proposing to raise funds from the public through issue of equity shares. However due to volatile financial markets, the price per share and the number of shares to be issued are left open and to be decided post closure of the issue. As a financial advisor of the company, what would you suggest to the Board in this regard as per the provisions of the Companies Act, 2013? [May 22 (4 Marks)]
Answer:
Raising funds through red herring Prospectus:
As the price per share and the number of shares to be issued are left open and to be decided post closure of the issue, company is advised to raise funds through issue of red herring prospectus. A prospectus which does not include complete particulars of the quantum or price of the securities included therein is known as red herring prospectus. Provisions relating to issue of red herring prospectus are covered u/s 32 of the Companies Act, 2013 and stated as below:

A company proposing to make an offer of securities may issue a red herring prospectus prior to the issue of a prospectus.
A company proposing to issue a red herring prospectus shall file it with the Registrar at least 3 days prior to the opening of the subscription list and the offer.
A red herring prospectus shall carry the same obligations as are applicable to a prospectus and any variation between the red herring prospectus and a prospectus shall be highlighted as variations in the prospectus.
Filing of Final Prospectus with Registrar and SEBI: Upon the closing of the offer of securities under this section, the prospectus stating therein the total capital raised, whether by way of debt or share capital, and the closing price of the securities and any other details as are not included in the red herring prospectus shall be filed with the Registrar and the SEBI.

Civil liability for mis-statements in prospectus (Sec. 35)

Question 7.
An allottee of shares in a company brought action against a director in respect of false statements made in the prospectus. The director contended that the statements were prepared by the promoters and he simply relied on them. Is the director liable under the circumstances? [MTP-Oct. 19]
OR
An allottee of shares in a company brought action against a director in respect of false statements made in the prospectus. The director contended that the statements were prepared by the Promoters and he simply relied on them, is the director liable under these circumstances? Decide referring to the provisions of the Companies Act, 2013. [MTP-March 18, Oct. 19, March 21]
Answer:
Liability for Mis-statement in Prospectus:
Director’s liability for false statements made in the prospectus are covered under sections 34 and 35 of the Companies Act, 2013. Sec. 34 imposes a criminal punishment on every person who authorises the issue of such prospectus, Sec. 35 more particularly includes a director of the company in the imposition of liability for such mis-statements.

Situations when a director will not incur any liability for mis-statements in a prospectus are as under:
(a) No criminal liability u/s 34 shall apply to a person if he proves that such statement or omission was immaterial or that he had reasonable grounds to believe, and did up to the time of issue of the prospectus believe, that the statement was true or the inclusion or omission was necessary.

(b) No civil liability for any mis-statement u/s 35 shall apply to a person if he proves that:

having consented to become a director of the company, he withdrew his consent before the issue of the prospectus, and that it was issued without his authority or consent; or
the prospectus was issued without his knowledge or consent, and that on becoming aware of its issue, he forthwith gave a reasonable public notice that it was issued without his knowledge or consent.
In the given case, an action brought against director in respect of false statement. Director contended that statement was prepared by promoters.

Conclusion: Director cannot escape the liability by stating that he had relied on the promoters for making correct statements in the prospectus. He will be liable for mis-statements in the prospectus.

Question 8.
All the statements contained in a prospectus Issued by a company were literally true. It was also stated in the prospectus that the company had paid dividends for a number of years but there was no disclosure regarding the fact that the dividends were paid out of realized capital profits and not out of trading profits. An allottee of shares wants to avoid the contract on the ground that the prospectus was false in material particulars. Can allottee avoid contract? [RTP-May 18]
Answer:
Liability for Mis-statement in Prospectus:
As per Sec. 34 of Companies Act, 2013, where any prospectus is issued, which includes any statement which is untrue or misleading in form or context in which it is included, then every person who authorises the issue of such prospectus shall be liable u/s 447.

In the given case, it was stated in the prospectus that the company had paid dividends for a number of years but there was no disclosure regarding the fact that the dividends were paid out of realized capital profits and not out of trading profits. An allottee of shares wants to avoid the contract on the ground that the prospectus was false in material particulars.

Non-disclosure of the fact that dividends were paid out of capital profits is a concealment of material fact as a company is normally required to distribute dividend only from trading or revenue profits and under exceptional circumstances it can pay dividend out of capital profits. Hence, a material misrepresentation has been made.

Conclusion: Allottee can avoid the contract on ground of material misrepresentations in the prospectus.

Question 9.
A prospectus issued by a company contained certain mis-statements. On becoming aware of the fact regarding misstatements in the prospectus, one of the experts Anilesh who had earlier given his consent, forthwith gave a reasonable public notice stating that the prospectus was issued without his knowledge and consent. Is it possible for Anilesh to escape liability for mis-statement in the prospectus?
Answer:
Defenses in case of Mis-statement in Prospectus:
As per Sec. 35 of Companies Act, 2013, where a person has subscribed for securities of a company acting on any statement included, or the inclusion or omission of any matter, in the prospectus which is misleading and has sustained any loss or damage as a consequence thereof, the company and every person including director of the company shall be liable to pay compensation to every person who has sustained such loss or damage.

However, a person shall not be liable if it is proved that the prospectus was issued without his knowledge or consent, and that on becoming aware of its issue, he forthwith gave a reasonable public notice that it was issued without his knowledge or consent.

In the given case, a prospectus issued by a company contained certain mis-statements. On becoming aware of the fact regarding mis-statements in the prospectus, one of the experts Anilesh who had earlier given his consent, forthwith gave a reasonable public notice stating that the prospectus was issued without his knowledge and consent.

Conclusion: Anilesh is covered under the exception provided by Sec. 35 and therefore, he will escape liability for mis-statement in the prospectus.

Question 10.
Sudarshan Exports Limited was dealing in export of rubber to specified foreign countries. The company was willing to purchase rubber trees in A.P. State. The prospectus issued by the company contained some important extracts of the expert’s report and number of trees in A.P. State. The report was found untrue. Mr. Alok purchase shares of Sudarshan Exports Ltd. on the basis of the Expert’s report published in the prospectus. Will Mr. Alok have any remedy against the company? State also the circumstances where an expert is not liable under the Companies Act, 2013. [MTP-May 20, RTP-May 20]
Answer:
Liability in case of Misstatement in Prospectus:
As per Sec. 35 of Companies Act, 2013, where a person has subscribed for securities of a company acting on any statement included, or the inclusion or omission of any matter, in the prospectus which is misleading and has sustained any loss or damage as a consequence thereof, the company and every person including expert shall be liable to pay compensation to every person who has sustained such loss or damage.

In the present case, Mr. Alok purchased the shares on the basis of the expert’s report published in the prospectus.

Conclusion: Mr. Alok can claim compensation for any loss or damage that he might have sustained from the purchase of shares, which has not been mentioned in the given case.

Circumstances when an expert is not liable:
No person shall be liable, if he proves that:
(a) having consented to become a director of the company, he withdrew his consent before the issue of the prospectus, and that it was issued without his authority or consent; or

(b) the prospectus was issued without his knowledge or consent, and that on becoming aware of its issue, he forthwith gave a reasonable public notice that it was issued without his knowledge or consent; or

(c) every misleading statement purported to be made by an expert or contained in what purports to be a copy of or an extract from a report or valuation of an expert, it was a correct and fair representation of the statement, or a correct copy of, or a correct and fair extract from, the report or valuation; and he had reasonable ground to believe and did up to the time of the issue of the prospectus believe, that the person making the statement was competent to make it and that the said person had given the consent required by Sec. 26 to the issue of the prospectus and had not withdrawn that consent before filing of a copy of the prospectus with the Registrar or, to the defendant’s knowledge, before allotment thereunder.

Question 11.
With the view to issue shares to the general public a prospectus containing some false information was issued by a company. Mr. X received copy of the prospectus from the company, but did not apply for allotment of any shares. The allotment of shares to the general public was completed by the company within the stipulated period. A few months later, Mr. X bought 2,000 shares through the Stock exchange at a higher price which later on fell sharply. X sold these shares at a heavy loss. Mr. X claims damages from the company for the loss suffered on the ground the prospectus issued by the company contained a false statement Referring to the provision of Companies Act 2013, Examine whether X’s claim for damages is justified. [MTP-March 18]
Answer:
Prospectus:
As per Sec. 2(70) of the Companies Act, 2013, “prospectus” means any document described or issued as a prospectus and includes a red herring prospectus referred to in Sec. 32 or shelf prospectus referred to in Sec. 31 or any notice, circular, advertisement or other document inviting offers from the public for the subscription or purchase of any securities of a body corporate.

A prospectus is a document inviting offers from the public. The prospectus and any statement therein have no legal binding either on the company or its directors, promoters or experts to a person who has not purchased securities in response to it.

In given case, Mr. X purchased 2,000 shares through the stock exchange (open market), not on basis of prospectus which contain false statements.

Conclusion: X’s claim for damages is not justified as he purchased shares through the stock exchange (open market) which cannot be said to have bought shares on the basis of prospectus.

Question 12.
RD Ltd, issued a prospectus. All the statements contained therein were literally true. It also stated that the company had paid dividends for a number of years but did not disclose the fact that the dividends were not paid out of trading profits but out of capital profits. An allotee of shares claims to avoid die contract on the ground that the prospectus was false in material particulars. Decide that the argument of shareholder, as per the provision of the Companies Act, 2013, is correct or not? [Dec. 21 (3 Marks)]
Answer:
Liability for Mis-statement in Prospectus:
As per Sec. 34 of the Companies Act, 2013, where a prospectus, issued, circulated or distributed, includes any statement which is untrue or misleading in form or context in which it is included or where any inclusion or omission of any matter is likely to mislead, every person who authorises the issue of such prospectus shall be liable u/s 447.

As per Sec. 35(3) of the Companies Act, 2013, where it is proved that a prospectus has been issued with intent to defraud the applicants for the securities of a company or any other person or for any fraudulent purpose, every person referred to in Sec. 35(1), shall be personally responsible, without any limitation of liability, for all or any of the losses or damages that may have been incurred by any person who subscribed to the securities on the basis of such prospectus.

In the given situation, the non-disclosure of the fact that dividends were paid out of capital profits is a concealment of material fact as a company is normally required to distribute dividend only from trading or revenue profits and under exceptional circumstances it can pay dividend out of capital profits. Hence, a material misrepresentation has been made.

Conclusion: Allottee can avoid the contract of allotment of shares.

Action by affected persons (Sec. 37)

Question 13.
M applies for equity shares of a company on the basis of a prospectus which contains misstatement. The shares are allotted to him, who afterwards transfers them to N. Whether N can bring an action for a rescission on the ground of mis-statement u/s 37 of the Companies Act, 2013?
Answer:
Action by Affected Persons:

As per Sec. 37 of Companies Act, 2013, a suit may be filed or any other action may be taken by any person, group of persons or any association of persons who have been affected by any misleading statement or the inclusion/ omission of any matter in the prospectus.
In given case, shares was allotted to M and afterwards, M transfer shares to N.

Conclusion: N cannot take action, only M is eligible to file a suit.

Allotment of securities by company (Sec. 39)

Question 14.
After having received 80% of the minimum subscription as stated in the prospectus, Raksha Detective Instruments Limited, before finalization of the allotment, withdrew 50% of the said amount from the bank for the purchase of certain assets. Thereafter, it started allotting the shares to the subscribers. Rashmi, one of the subscribers, was allotted 1,000 equity shares. She, however, refused to accept the allotment on the ground that such allotment was violative of the provisions of the Companies Act, 2013. Whether action of Rashmi valid?
Answer:
Allotment of Securities by Company:

As per Sec. 39 of Companies Act, 2013, allotment of any securities of a company offered to the public for subscription shall not be made unless the amount stated in the prospectus as the minimum amount has been subscribed and the sums payable on application for the amount so stated have been paid to and received by the company.
If the stated minimum amount has not been subscribed and the sum payable on application is not received, the amount received shall be returned within 15 days from date of closure of issue.
In given case, company received 80% of minimum subscription stated in prospectus and withdrew 50% of said amount.

Conclusion: Rashmi is within her rights to refuse the allotment of shares which has been illegally made by the company.

Question 15.
Explain various instances which make the allotment of securities as irregular allotment under the Companies Act, 2013. [May 19 (4 Marks)]
Answer:
Instances of Irregular Allotment:
An allotment of shares is deemed to be irregular when it has been made by a company in violation of various provisions of Companies Act, 2013. Irregular allotment arises in following instances:
(a) Where a company does not issue a prospectus in a public offer (Sec. 23).
(b) Where the prospectus issued by the company does not include any matters which was required as per Act or information given is misleading, faulty and incorrect (Sec. 26).
(c) Where the prospectus has not filed with the Registrar (Sec. 26).
(d) Where the minimum subscription as specified in the prospectus has not been received (Sec. 39).
(e) Where the amount received on application is less than 5% of the nominal value of the securities offered or lower than the amount prescribed by SEBI in this behalf (Sec. 39).
(f) Where approval for listing has not been obtained from one or more recognized stock exchanges (Sec. 40).

Question 16.
Mow does the Companies Act, 2013 regulate and restrict the following matters in respect of a company going for public issue of shares:
(a) Minimum Amount stated in the Prospectus; and
(b) Application Money payable on shares. [MTP-Oct 18, April 19, April 21]
Answer:
Minimum Subscription and Application Money:
Sec. 39 of the Companies Act, 2013 regulates and restricts the minimum amount stated in the prospectus and the application money payable in a public issue of shares.

(a) Minimum amount stated in prospectus (Sec. 39):
No Allotment shall be made of any securities of a company offered to the public for subscription; unless; –

the amount stated in the prospectus as the minimum amount has been subscribed; and
the sums payable on application for such amount has been paid to and received by the company.

(b) Application money payable on shares:

The amount payable on application on every security shall not be less than 5% of the nominal amount of the security or such other percentage or amount, as may be specified by the SEBI.
If the stated minimum amount has not been subscribed and the sum payable on application is not received within 30 days of the date of issue of the prospectus or such time as prescribed by SEBI, then the application money shall be repaid within a period of 15 days from the closure of the issue.
If any such money is not so repaid within such period, the directors of the company who are officers in default shall jointly and severally be liable to repay that money with interest at the rate of 15% p.a.
As per Sec. 40 of Companies Act, 2013, all the moneys received on application from public for subscription to the securities shall be kept in a separate bank account.

Securities to be dealt with in Stock Exchanges (Sec. 40)

Question 17.
A Public Limited company which wanted to raise funds through public issue of shares had applied for listing of its shares in three recognized stock exchanges. However, only two exchanges had given permission for listing. Can the company proceed with the public offer?
Answer:
Listing of Securities:

As per Sec. 40 of Companies Act, 2013, every company making public offer, before making such offer, shall, make an application to one or more recognized stock exchange or exchanges to obtain permission for the securities to be dealt with.
The prospectus shall state the name of the stock exchange to which application is made.
Any allotment made without permission of recognized stock exchanges shall be void.
In the given case, company applied for listing of shares in three recognized stock exchanges but only two exchanges had given permission for listing.

Conclusion: Company cannot proceed with public offer before necessary approval from stock exchanges.

Question 18.
The board of directors of a company decides to pay 5% of issue price as underwriting commission to the underwriters. However, the articles of association of the company permit only 3% commission. The BOD further decides to pay the commission out of the proceeds of the share capital. Are the decisions taken by the board of directors valid?
Answer:
Underwriting Commission in case of shares:
As per Sec. 40(6) of Companies Act, 2013, a company may pay commission to any person in connection with the subscription to its securities subject to some conditions.

In the given case, Board of directors decides to pay 5% commission and articles provides 3%.

Conclusion : Decision taken by Board of Directors are not valid. Company cannot give more than 3%. However, the decision to pay commission out of the proceeds of the share issue is valid provided it is paid at the rate authorised by the Articles.

Question 19.
Unique Builders Limited decides to pay 2.5% of the value of debentures as underwriting commission to the underwriters but Articles of the company authorize only 2% underwriting commission on debentures. The company further decides to pay the underwriting commission in form of flats. Examine the validity of the above arrangements under the provisions of the Companies Act, 2013. [RTP-May 18]
Answer:
Underwriting Commission in case of Debentures:
As per Sec. 40(6) of Companies Act, 2013, a company may pay commission to any person in connection with the subscription to its securities subject to some conditions.

Rule 13 of Companies (Prospectus and Allotment of Securities) Rules, 2014 imposes certain restrictions subject to which underwriting commission may be paid. These restrictions are:
(a) The payment of such commission shall be authorized in the company’s articles of association.
(b) The commission may be paid out of proceeds of the issue or the profit of the company or both.
(c) The rate of commission paid or agreed to be paid shall not exceed in case of debentures, 2.5% of the price at which the shares are issued or a rate authorised by the articles, whichever is less.

In the given case, Board of directors decides to pay 2.5% commission and articles provides 2%.

Conclusion: Decision of Unique Builders Limited to pay underwriting commission in excess of 2% is not valid.
However, the company may pay the underwriting commission in the form of flats as the Companies Act do not impose any restriction on the mode of payment though the source has been restricted to either the proceeds of the issue or profits of the company.

Question 20.
The Articles of association of X Limited contain a provision that the underwriting commission may be paid up to 4% of the issue price of the shares. However, the Board of Directors have decided to pay the underwriting commission of 5% to Deal & Co., the underwriters. Examine the validity of the statement with reference to the provisions of the Companies Act, 2013: [MTP-April 19]
OR
Modern Jewellery Ltd. decides to pay 5% of issue price of shares as underwriting commission to the underwriter, but the articles of the company authorize only 4% underwriting commission on shares. Examine the validity of the above decision under the provision of the Companies Act, 2013? [May 19 (2 Marks)]
Answer:
Underwriting Commission in case of shares:
As per Sec. 40(6] of Companies Act, 2013, a company may pay commission to any person in connection with the subscription to its securities subject to some conditions.

In given case, Board of directors decides to pay 5% commission and articles provides 4%.

Conclusion: Decision taken by Board of Directors is not valid. Company cannot give more than 4%.

Question 21.
TDL Ltd., a public company is planning to bring a public issue of equity shares in June, 2022. The company has appointed underwriters or getting its shares subscribed. As a Chartered Accountant of the company appraise the Board of TDL Ltd. about the provisions of payment of underwriters commission as per Companies Act, 2013 [May 18 (6 Marks}]
Answer:
Underwriting Commission in case of shares:
As per Sec. 40(6) of Companies Act, 2013, a company may pay commission to any person in
connection with the subscription to its securities subject to some conditions.

Rule 13 of Companies (Prospectus and Allotment of Securities] Rules, 2014 imposes certain
restrictions subject to which underwriting commission may be paid. These restrictions are:
(a) The payment of such commission shall be authorized in the company’s articles of association.
(b) The commission may be paid out of proceeds of the issue or the profit of the company or both.
(c) The rate of commission paid or agreed to be paid shall not exceed in case of shares, 5% of the price at which the shares are issued or a rate authorised by the articles, whichever is less.
(d) The prospectus of the company shall disclose the name of the underwriters, the rate and amount of the commission payable to the underwriter and the number of securities which is to be underwritten or subscribed by the underwriter absolutely or conditionally.
(e) There shall not be paid commission to any underwriter on securities which are not offered to the public for subscription.
(f) A copy of the contract for the payment of commission is delivered to the Registrar at the time of delivery of the prospectus for registration.

Question 22.
A Ltd. issued 1,00,000 equity shares of ₹100 each at par to the public by issuing a prospectus. The prospectus discloses the minimum subscription amount of ₹ 15,00,000 required to be received on application of shares and the share application money shall be payable at ₹ 20 per share. The prospectus further reveals that A Ltd. has applied for listing of shares in three recognized Stock Exchanges of which one application has been rejected. The issue was fully subscribed and A Ltd. received an amount of ₹ 20,00,000 on share application. A Ltd., then proceeded for allotment of shares.

Examine the three disclosures in the above case studies which are the deciding factors in an allotment of shares and the consequences for violation, if any under the provision of the Companies Act, 2013. [Jan. 21 (6 Marks)]
Answer:
Validity of Allotment based on disclosures stated in the prospectus:
Legal provisions w.r.t. three disclosures given in the prospectus are as under:
(a) Disclosure as to Minimum Subscription:
As per Sec. 39 of Companies Act, 2013, no allotment of any securities of a company offered to the public for subscription shall be made unless the amount stated in the prospectus as the minimum amount has been subscribed and the sums payable on application for the amount so stated have been paid to and received by the company.

(b) Application Money:
As per Sec. 39 of the Coampnies Act, 2013 the amount payable on application on every security shall not be less than 5% of the nominal amount of the security or such other percentage or amount, as may be specified by the SEBI.

(c) Listing of Secuties:
As per Sec. 40(1) of Companies Act, 2013, every company making public offer, before making such offer, shall, make an application to one or more recognized stock exchange or exchanges to obtain permission for the securities to be dealt with. The prospectus shall state the name of the stock exchange to which application is made. Any allotment made without permission of recognized stock exchanges shall be void.

Conclusion: Based on the facts stated in the question and legal provisions as stated above, following conclusions may be drawn:
(a) Disclosures as to Minimum Subscription is in compliance with statutory provisions.
(b) Disclosures as to Minimum application money is in compliance with statutory provisions.
(c) Disclosure as to listing of securities is not proper as company applied for listing of shares in three recognized stock exchanges but one application has been rejected and company still proceed for allotment of shares.

Consequence for violation of Sec. 40:
Company shall be punishable with a fine which shall not be less than ₹ 5 lakh but which may extend to 50 lakh and every officer of the company who is in default shall be punishable with fine which shall not be less than ₹ 50,000 but which may extend to ₹ 3 lakh.

Offer of invitation for subscription of securities on Private Placement (Sec. 42)

Question 23.
Discuss the provisions relating to private placement of shares under the Companies Act, 2013. [Nov. 18 (5 Marks)]
Answer:
Provisions related with Private Placement:
The term “private placement” means any offer of securities or invitation to subscribe securities to a select group of persons by a company (other than by way of public offer) through issue of a private placement offer-cum-application, which satisfies the conditions specified in this section.

Conditions for Private Placement (Sec. 42):
(1) Offer of private placement: A private placement shall be made only to a Select group of persons who have been identified by the Board (‘Identified Persons’) through issue of a private placement offer-cum-application.

(2) Number of Persons: The offer of securities or invitation to subscribe securities, shall be made maximum to 50 persons or such higher number as may be prescribed, in a financial year and on such conditions (including the form and manner of private placement) as may be prescribed. However, this does not include Qualified institutional buyers and employees of the company being offered securities under a scheme of employee’s stock option.

(3) Deemed Public Offer: If a company, listed or unlisted, makes an offer to allot or invites subscription, or allots, or enters into an agreement to allot, securities to more than prescribed number of persons, whether the payment for the securities has been received or not or whether the company intends to list its securities or not on any recognized stock exchange in or outside India, the same shall be deemed to be an offer to the public.

(4) Limit on Fresh Offer: No fresh offer or invitation u/s 42 shall be made unless the allotments with respect to any offer or invitation made earlier have been completed or that offer or invitation has been withdrawn or abandoned by the company.

(5) Offer/invitation treated as public offer: Any offer or invitation not in compliance with the provisions of this section shall be treated as a public offer and all provisions of this Act, and the Securities Contracts (Regulation) Act, 1956 and the Securities and Exchange Board of India Act, 1992 shall be required to be complied with.

(6) Payment of amount: Every identified person willing to subscribe to the private placement issue shall apply in the private placement and application issued to such person along with subscription money paid either by cheque or demand draft or other banking channel and not by cash.

(7) Time for allotment of securities: A company making an offer or invitation under this section shall allot its securities within 60 days from the date of receipt of the application money for such securities. Where the company is not able to allot the securities within stated period, it shall repay the application money to the subscribers within 15 days from the date of completion of sixty days. If the company fails to repay the application money within the aforesaid period, it shall be liable to repay that money with interest @ of 12% per annum from the expiry of the sixtieth day.

(8) Separate Bank Account: Monies received on application shall be kept in a separate bank account in a scheduled bank and shall be utilised only for the following purpose-

for adjustment against allotment of securities; or
for the repayment of monies where the company is unable to allot securities.

(9) Public Advertisement: Company offering securities under this section shall not publish any public advertisements or utilise any media, marketing or distribution channels or agents to inform the public at large about such an offer.

(10) Return of Allotment: A company making any allotment of securities shall file with the Registrar a return of allotment within 15 days from the date of the allotment in such manner as may be prescribed, including a complete list of all allottees, with their full names, addresses, number of securities allotted and such other relevant information as may be prescribed.

(11) Penalty for contraventions: If a company makes an offer or accepts monies in contravention of this section, the company, its promoters and directors shall be liable for a penalty which may extend to the amount raised through the private placement or ₹ 2 crore, whichever is lower, and the company shall also refund all monies with interest to subscribers within a period of 30 days of the order imposing the penalty.

Question 24.
Ruhi and her Younger brother Sohit were offered 1,000 equity shares of ₹ 100 each by Soumya Software Private Limited under the issue of shares on private placement basis. From whose account the company is required to take subscription money for 1,000 equity shares?
Answer:
Payment of money in case of private placement:

As per Rule 14 of Companies (Prospectus and Allotment of Securities) Rules, 2014, payment to be made for subscription to securities shall be made from the bank account of the person subscribing to such securities and the company shall keep the record of the bank account from where such payment for subscription has been received.
In case of joint holders, monies payable on subscription to securities to be held by joint holders shall be paid from the bank account of the person whose name appears first in the application.
In given case, company issue 1,000 shares to Ruhi and her younger brother Sohit on private placement basis.

Conclusion: Company is required to take subscription money from account of the person whose names appear first in application. It may be presumed here that Ruhi’s name appears first in the application and therefore, the subscription of ₹ 1,00,000 shall be payable by her from her account. It is obligatory for the company to ensure that the money is paid from her bank account and not from the bank account of her younger brother Sohit.

Question 25.
PQR Bakers Limited wants to raise funds for its upcoming project Accordingly, it has issued private placement offer letters for issuing equity shares to 55 persons, of which four are qualified institutional buyers and remaining are individuals. Before the completion of allotment of equity shares under this offer letter, company issued another private placement offer letter to another 155 persons in their individual names for issue of its debentures.

Being a public company is it possible for PQR Bakers Limited to issue securities under a private placement offer? By doing so, whether the company is in compliance with provisions relating to private placement or should these offers be treated as public offers? What if the offer for debentures is given after allotment of equity shares but within same financial year? [MTP-March 21]
Answer:
Private Placement:
As per Sec. 42 of Companies Act, 2013, a private placement shall be made only to a select group of persons who have been identified by the Board through issue of a private placement offer-cum- application. The offer of securities or invitation to subscribe securities, shall be made maximum to 50 persons or such higher number as may be prescribed, in a financial year and on such conditions as may be prescribed. However, this does not include qualified institutional buyers and employees of the company being offered securities under a scheme of employee’s stock option.

As per Rule 14 of Companies (Prospectus and Allotment of Securities) Rules, 2014, such offer or invitation shall be made to not more than 200 persons in the aggregate in a financial year. If a company makes an offer or invitation to more than the prescribed number of persons, it shall be deemed to be an offer to the public and accordingly, it shall be governed by the provisions relating to prospectus. The restrictions would be reckoned individually for each kind of security that is equity share, preference share or debenture.

No fresh offer or invitation u/s 42 shall be made unless the allotments with respect to any offer or invitation made earlier have been completed or that offer or invitation has been withdrawn or abandoned by the company.

Any offer or invitation not in compliance with the provisions of Sec. 42 shall be treated as a public offer and all provisions will apply accordingly.

In given case, PQR Bakers Limited issued private placement offer letters for issuing equity shares to 55 persons. Before the completion of allotment of equity shares under this offer letter, company issued another private placement offer letter to another 155 persons in their individual names for issue of its debentures.

Conclusion: Applying the provisions as stated above, following conclusions may be drawn:
(a) PQR Bakers Limited is allowed to raise funds through private placement offer. The company has given offer to 55 persons out of which 4 are qualified institutional buyers and hence, the offer is given effectively to only 51 persons which is well within the limit of 200 persons. From this point of view, the company complies the private placement provisions.

(b) Private placement offer of debentures was made before completing the allotment in respect of first offer and therefore, the second offer does not comply with the provisions of Sec. 42. Hence, the offers given by the company will be treated as public offer.

(c) If the offer for debentures is given after allotment of equity shares, then both the offers can be treated as private placement offers.

Question 26.
The Board of Directors of Reckless Investments Limited, having registered office at Mumbai, has allotted equity shares to the 550 investors of the company without issuing a prospectus. As no prospectus was issued, nothing was delivered to the ROC, Mumbai for filing. Explain the remedy available to the investors in this regard. [MTP-Aug. 18]
Answer:
Issue of Securities without prospectus:

As per Sec. 23 of the Companies Act, 2013, a public company can issue securities to public only by issue of prospectus.
As per Sec. 26 of the Companies Act, 2013, prospectus shall state such information and set out such reports on financial information as may be specified by the SEBI in consultation with the C.G. and file copy of prospectus to Registrar, on or before date of Publication.
As per Sec. 42 of the Companies Act, 2013, if a company makes an offer to allot or invites subscription securities to more than 200 persons, whether the payment for the securities has been received or not or whether the company intends to list its securities or not on any recognized stock exchange in or outside India, the same shall be deemed to be an offer to the public.
In the given case. Board of Directors of Reckless Investments Limited has allotted equity shares to the 550 investors of the company without issuing a prospectus.

Conclusion: Company has violated the provisions of Sec. 23 and 26 and therefore, the allotment made by it is void. The company will be required to refund the entire moneys received and will also be punishable u/s 26.

Question 27.
CDS Ltd. is planning to make a private placement of securities. The managing director arranged to obtain to a brief note from some source explaining the salient features of the issue of private placement that the Board of Directors shall keep in mind while approving the proposal on this subject. The brief note includes, inter alia, the information/suggestions on the following points:
(a) A private placement shall be made only to a select group of identified persons not exceeding 200 in a financial year.
The aforesaid ceiling of identified persons shall not apply to the offer made to the Qualified institutional Buyers but is applicable to employees of the company who will be covered under the company’s employees stock option scheme.
(b) The offer on private placement basis shall be made only once in a financial year for any number of identified persons not exceeding 200.
The Company solicits your remarks on the points referred above as to whether they are valid or not? Reasoned remarks should be given in accordance with the provisions of the Companies Act, 2013. [Jan. 21 (4 Marks)]
Answer:
Private Placement:

Legal provisions relating to placement are covered under sec. 42 of Companies Act, 2013 read with Rule 14 of Companies (Prospectus and Allotment of Securities) Rules, 2014.
As per Sec. 42 of the Companies Act, 2013, the offer of securities or invitation to subscribe securities, shall be made maximum to 50 persons or such higher number as may be prescribed, in a financial year. However, this does not include qualified institutional buyers and employees of the company being offered securities under a scheme of employee’s stock option.
As per Rule 14 of Companies (Prospectus and Allotment of Securities) Rules, 2014, such offer or invitation shall be made to not more than 200 persons in the aggregate in a financial year.
No fresh offer or invitation u/s 42 shall be made unless the allotments with respect to any offer or invitation made earlier have been completed or that offer or invitation has been withdrawn or abandoned by the company.

Provided that, subject to the maximum number of identified persons, a company may, at any time, make more than one issue of securities to such class of identified persons as may be prescribed.

Conclusion: Based on the legal provisions as stated above, following conclusions may be drawn:
(a) Ceiling of identified persons shall not apply to the offer made to the Qualified institutional buyers as well as to the employees of the company who are covered under the company’s employees stock option scheme.

(b) Subject to the maximum number of identified persons, a company may, at any time, make more than one issue of securities to such class of identified persons as may be prescribed.

Question 28.
Examine that following offers of ABC Limited are in compliance with provisions of the Companies Act, 2013, related to private placement or should these offers be treated as public:
(i) ABC limited wants to raise funds for its upcoming project. It has issued private placement offer letters to 55 persons in their individual name to issue its equity shares. Out of these four are qualified institutional buyers.
(ii) If in case (i) before allotment under this offer letter company issued another private placement offer to another 155 persons in their individual name for issue of its debentures.
(iii) Being a public company can it issue securities in a private placement offers? [Dec 21 (5 Marks)]
Answer:
Private Placement:
As per Sec, 42 of Companies Act, 2013, a private placement shall be made only to a select group of persons who have been identified by the Board through issue of a private placement offer- cum-application. The offer of securities or invitation to subscribe securities, shall be made maximum to 50 persons or such higher number as may be prescribed, in a financial year and on such conditions as may be prescribed. However, this does not include qualified institutional buyers and employees of the company being offered securities under a scheme of employee’s stock option.

As per Rule 14 of Companies [Prospectus and Allotment of Securities] Rules, 2014, such offer or invitation shall be made to not more than 200 persons in the aggregate in a financial year. If a company makes an offer or invitation to more than the prescribed number of persons, it shall be deemed to be an offer to the public and accordingly, it shall be governed by the provisions relating to prospectus. The restrictions would be reckoned individually for each kind of security that is equity share, preference share or debenture.

Any offer or invitation not in compliance with the provisions of Sec. 42 shall be treated as a public offer and all provisions will apply accordingly.

Conclusion: Applying the provisions as stated above, following conclusions may be drawn:
[a] ABC Limited is allowed to raise funds through private placement offer. The company has given offer to 55 persons out of which 4 are qualified institutional buyers and hence, the offer is given effectively to only 51 persons which is well within the limit of 200 persons. From this point of view, the company complies the private placement provisions.

[b] Private placement offer of debentures was made before completing the allotment in respect of first offer and therefore, the second offer does not comply with the provisions of Sec. 42. Hence, the offers given by the company will be treated as public offer.

In case the company gives offer for debentures in the same financial year after allotment of equity shares is complete then both the offers can well be treated as private placement offers.

[c] ABC Limited can issue securities in a private placement offer.

Question 29.
Swati Limited is intending to issue its securities on private placement basis. Explain to the directors of the company, the provisions of the Companies Act, 2013, on the following matters:
(i) Meaning of Private Placement
(ii) ‘Time Limit for Allotment of Securities’ and ‘repayment of application money in case of default in allotment’ [MTP-March 22]
Answer:
(i) Meaning of‘Private Placement’:
As per Explanation I to Sec. 42[3], the term “private placement” means any offer or invitation to subscribe or issue of securities to a select group of persons by a company [other than by way of public offer) through private placement offer-cum-application, which satisfies the conditions specified in section 42.

(ii) ‘Time Limit for Allotment of Securities’ and ‘repayment of application money in case of default in allotment’:
A company making an offer or invitation u/s 42 shall allot its securities within 60 days from the date of receipt of the application money for such securities and if the company is not able to allot the securities within that period, it shall repay the application money to the subscribers within 15 days from the expiry of 60 days and if the company fails to repay the application money within the aforesaid period, it shall be liable to repay that money with interest at the rate of 12% p.a. from the expiry of the 16th day.

Miscellaneous Questions

Question 30.
Keya Limited decides to issue 1,00,000 securities of the company. The company decides to publish an advertisement of the prospectus. Enumerate to the company about necessary contents of its memorandum to be specified therein. [RTP-May 21]
Answer:
Advertisement of Prospectus:
As per Sec. 30, where an advertisement of any prospectus of a company is published in any manner, it shall be necessary to specify therein the contents of its memorandum as regards the following:

the objects,
the liability of members and the amount of share capital of the company,
the names of the signatories to the memorandum,
the number of shares subscribed for by the signatories, and
the capital structure of the company.

NOTE: Sec. 30 is though excluded from the syllabus, but a question was asked in RTP of May 2021 Exams.

Question 31.
What is meant by “Abridged Prospectus”? Under what circumstances an abridged prospectus need not accompany the detailed information regarding prospectus along with the application form? [MTP-Oct 21]
Answer:
Meaning of Abridged Prospectus:
As per Sec. 2(1) of the Companies Act, 2018, an abridged prospectus means a memorandum containing such salient features of a prospectus as may be specified by the SEBI by making regulations in this behalf.

Circumstances under which the abridged prospectus need not accompany the application forms:
Sec. 33(1) of the Companies Act, 2013 states that no application form for the purchase of any of the securities of a company can be issued unless such form is accompanied by an abridged prospectus.

In terms of the Proviso to Sec. 33(1) an abridged prospectus need not accompany the application form if it is shown that the form of application was issued:

In connection with a bona fide invitation to a person to enter into an underwriting agreement with respect to such securities; or
Where the securities are not offered to the public.

NOTE: Sec. 33 is though excluded from the syllabus, but a question was asked in MTP of Oct. 21.

Prospectus and Allotment of Securities – CA Inter Law Study Material

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